We hear a lot these days about the strains on the sandwich generation, those caught between the demands of their children and their aging parents. Yet a recent study suggests these intergenerational demands aren’t always equal: while children can strain middle-aged pocketbooks, aging parents generally don’t.

Indeed, older family members are more often on the giving end than on the receiving end of financial support, according to a recent study by the Employee Benefit Research Institute (EBRI). The goal with familial cash transfers is to make sure they’re based on math, not emotion, so they don’t endanger the giver’s near-term finances or retirement security, experts say.

In 2010, only about 4% of households with at least one member age 50 or above reported receiving cash transfers, including monetary gifts, loans or direct help paying bills, from their children or grandchildren over the previous two years.

Meanwhile, up to 45% of older households reported giving money to their younger family members, according the EBRI report, “Intra-Family Cash Transfers in Older American Households,” which analyzed data from the University of Michigan Health and Retirement Study, a long-running survey of older households conducted every two years.

The cash involved isn’t chump change, either: during the two-year period between 2008 and 2010, the average amount transferred by households who had at least one member between ages 50 and 64 was $8,350, while the average transferred by households with at least one member aged 85 or above was $4,787.

Planning for it

Often, this type of familial assistance isn’t formally budgeted for, experts say. “We think of cash transfers as discretionary, so they’re not included in the household budget,” said Sudipto Banerjee, research associate at EBRI and author of the report.

When it’s not properly accounted for, such help can pose a threat to the giver’s retirement security. “From a planning perspective, it’s important to determine what you’re willing to do, how you’re going to do it, and how it will impact your finances,” said Stein Olavsrud, a certified financial planner with FBB Capital Partners in Bethesda, Md.

Ideally, it’s best for families to consider the parameters of their potential support before confronted with a request. Parents who paid their minor child’s every expense should proactively consider whether they will contribute to their young adult’s down payment or graduate degree. “When a parent is faced with the need to support a child, they emotionally respond ‘yes’ and they often don’t take their financial life into account,” said Mark Avallone, founder and president of Potomac Wealth Advisors in Rockville, Md.

Thinking about future needs

Pre-retirees are more at risk of jeopardizing their nest egg than those already in retirement when giving cash to relatives, experts say. People who are still saving and investing for their retirement often don’t appreciate “the magnitude of their future retirement needs,” Avallone said. By contrast, those already in retirement are used to living on a fixed budget and have a better idea of how much money they can afford to give their relatives.

The mantra of retirement planning won’t change. ‘You have to take care of yourself first.’
Stein Olavsrud, adviser

Not only do pre-retirees tend to underestimate their future needs, but many also tend to overestimate their financial position, Avallone said. He has midlife clients who have amassed bigger savings than they’d imagined possible when they were young, so they feel they have ample resources to share with their adult children without doing any math to back it up.

For many boomers, “having a million dollars meant you’d be wealthy,” Avallone said. Indeed, $1 million was the median amount estimated by workers of all ages — from their 20s to their 60s and beyond — to be necessary to retire comfortably, according to the 16th Annual Transamerica Retirement Survey of Workers released this spring.

While a million dollars is indeed much more than most Americans have amassed on the cusp of retirement, experts caution that it’s not enough to guarantee a comfortable retirement for a couple retiring today, much less one retiring in 10 to 15 years. After all, medical costs alone are estimated to gobble up $220,000 over the lifetime of a couple retiring in 2014 at age 65, according to Fidelity, and that amount doesn’t even include long-term care costs such as those associated with nursing homes or assisted living facilities.

Meanwhile, mid-lifers in the sandwich generation most frequently support their aging parents with time and service — not cash, experts say. This type of care could still result in financial hardship for the adult children if they’re forced to cut back at work to accommodate their parents’ needs.

Michael Delgass, managing director of Sontag Advisory in New York City, said he has a few clients who financially support their older parents, but for the most part, “money transfers downhill.” This dynamic could change in the coming decades, as fewer older people have pensions. Many of today’s retirees enjoy the financial cushion of a guaranteed income stream, which frees up funds for family members.

Either way, the mantra of retirement planning won’t change, Olavsrud said: “You have to take care of yourself first.” After all, those who gave generously to family members only to wind up short in old age will find the tables turned when they become dependent on the younger generation.

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